Interest rates cut to spur economy
Print Edition
CHINA’S central bank yesterday announced cuts in interest rates and reserve requirements for lenders in a move to stabilize the stock market and shore up the country’s sagging economy.
The People’s Bank of China said one-year lending and deposit rates would be lowered by 25 basis points to 4.6 percent and 1.75 percent respectively from today.
It is the fifth interest rate cut since November 2014.
“The interest rate cut is aimed at lowering the social cost of financing and to support the sustainable and healthy development of the real economy,” the central bank said in a statement on its website.
The reserve requirement ratio, the amount banks are required to hold, will be cut by 50 basis points from September 6 in order to “maintain a reasonable and ample liquidity at the banking system,” the central bank said.
The ratio for commercial banks serving rural areas, agriculture and small businesses will be lowered by an extra 50 basis points while the ratio for financial leasing and auto financing companies will be cut by an additional 300 basis points, the central bank added.
Yang Delong, chief strategist with China Southern Fund Management, said the moves were a “welcome relief for both the economy and the stock market, sending a positive signal to the market and helping to boost investor confidence that had been badly burned by continuous slumps.”
The bank’s move came hours after the benchmark Shanghai Composite Index closed down by 7.63 percent, following Monday’s 8.49 percent slump. The tumbles extended a rout emerging in mid-June that had turned the index’s 60 percent gain this year to a loss of 8 percent.
The central government had intervened in the early stages of the collapse with measures that included suspending new share offerings, forbidding short selling and buying shares with state funds.
Analysts said yesterday’s cuts indicated a shift of rescue strategies from direct intervention in the equity market, which had been blamed for distorting the market.
Kamel Mellahi, a professor at Warwick Business School who researches emerging markets, said the cuts may calm stock market turmoil but did not address underlying causes.
The government also faces pressures to stabilize growth as weaker-than-expected factory activity has triggered concerns about the economy. The Caixin Flash China General Manufacturing PMI dropped to 47.1 in August, its lowest reading since March 2009.
“The devaluation of the yuan, a decline in exports, and multiple signs that China’s economic pulse is slowing down at a much faster pace than expected have created a toxic cocktail, fueling uncertainty and eroding confidence in the turnaround of the Chinese economy,” Mellahi said.
ANZ Research estimated that yesterday’s cut in the reserve requirement ratio would inject up to 650 billion yuan (US$101.4 billion) in liquidity into the banking system, spurring banks to lend to the real economy.
“However, we believe that the traditional monetary policy easing is not sufficient to mitigate the risks associated with China’s highly leveraged economy,” ANZ wrote in a note.
“In fact, more financial liberalization is also needed by allowing Chinese corporate and local governments to tap into the bond market with ease.”
ANZ expected the government to announce another ratio cut of 50 basis points in the fourth quarter and additional targeted measures in order to maintain economic growth at the government’s target of around 7 percent.
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